Regional Differences in Doing Business In Ukraine

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Godwin Welch
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1 Regional Differences in Doing Business In Ukraine Dr. Edilberto Segura Partner and Chief Economist, SigmaBleyzer President of the Board, The Bleyzer Foundation June 13 1

Population* GDP per capita, $ Real GDP growth** 1.7 2 4-7 8-1-11 5.7-5.1 4.7 Population* GDP per capita, $ Real GDP growth** Regions of Ukraine Population* GDP per capita, $ Real GDP growth** 7.

2 Population* GDP per capita, $ Real GDP growth** Population* GDP per capita, $ Real GDP growth** Regions of Ukraine Population* GDP per capita, $ Real GDP growth** Population* GDP per capita, $ Real GDP growth** Population* GDP per capita, $ Real GDP growth** Source: State Statistical Service of Ukraine, Wikipedia, The Bleyzer Foundation East * As of end-11, million The and East have equal populations. But they differ significantly in GDP per capita and economic growth. GDP per capita of the Eastern region is almost twice as much as in the ern region. Also, the Eastern region grew much faster during 4-7 and 1-11 than ern one. But it also suffered more during the crisis of 8-.

3 Regional Shares in Sector Value-Added East East 1 East Agriculture Industry Construction and Real Estate East 18 East Trade Transp'n/Com'n Finance Source: State Statistical Service of Ukraine, The Bleyzer Foundation East All regions of Ukraine are suited for agriculture. However, the Central and ern Regions contribute the most to the sector. The Central Region has an advantage in grain production, while the specializes more on animal breeding. Industry is concentrated in the East and Central Regions. But the Eastern oblasts have also good agricultural potential, contributing to agriculture on par with the and. ern oblasts (including Kyiv city) lead in Construction and Real Estate, and Services, particularly Trade and Finance. Having access to ports in 2 seas and a good transportation network, the ern region is a large contributor to Transport Services.

4 Regional Distribution of FDIs - $54.5 billion total 3 25 FDI Stock, $ billion Average FDI Flow, 11-12, $ billion Kyiv East Kyiv East FDI flows to Ukraine are heavily concentrated, with Kyiv city firms taking 4% of the total. Measured by the stock of FDI, almost % of overall FDI was directed to firms in Kyiv city, Dnipropetrovs'k (), Donetsk and Kharkiv (East), Lviv, and Kyiv () oblasts.

5 GDP per capita, 11, weighted average, thousand US$ FDI Stock by Region and GDP per Capita 11 7 Kyiv city 4% 5 3 1, 5% East 13%, 7%, 7% 1% FDI stock, $ billion Source: State Statistical Service of Ukraine, The Bleyzer Foundation The regional distribution of FDI is correlated to GDP per capita (proxy for the size of local consumer markets), which supports the idea that foreign companies in Ukraine implement investment projects that target domestic consumers.

6 FDI Stock Breakdown by Sector and Region FDI Stock Other sectors Financial services Transport'n/Comm'n Trade Construction/Real Estate Industry Agriculture Source: State Statistical Service of Ukraine, The Bleyzer Foundation The sector distribution of FDI reflect the economic profiles of the regions of Ukraine. Kyiv city received the most FDIs to financial sector, transportation, trade and real estate. Eastern region leads in FDIs into industrial sector, while the ern region had the highest contribution to agriculture Agriculture Industry Construction /Real Estate Trade Transp'n /Comm'n Finance Kyiv city East

7 FDI Flows by Sector & Region for 11-12, $ billion Other Finance Transp'n / Comm'n Trade East Kyiv city Construction /Real Estate Industry Agriculture Source: State Statistical Service of Ukraine, The Bleyzer Foundation

8 Impact of Factors of Production and Infrastructure on FDIs Infrastructure Quality Labor Quality Technological Readiness Source: Own calculations based on Ukrainian National Competitiveness Report 12, Foundation for Effective Governance The above business environment indicators are scored from 1 (worst) to 7 (best). In addition to the market size, FDI pattern to various regions is broadly consistent with the quality of their infrastructure, labor quality and technological development. Because of these favorable factors, Kyiv City and the East are ranked highly in surveys of competitiveness, whereas the is generally ranked low in competitiveness.

9 But some soft indicators of Business Environment show a different picture: Public Governance Legal Environment and Judiciary Kyiv East Kyiv East Source: Own calculations based on Ukrainian National Competitiveness Report 12, Foundation for Effective Governance Although the is in a less advantageous position in terms of infrastructure and factors of production, it has a more friendly environment for doing business in most of the soft indicators, such as public governance and legal environment and judiciary. Kyiv city, however, is rated poorly on these indicators.

10 Impact of Business Environment (2) 4. Business Regulations and Access to Finance Corruption and Crime Kyiv East 2. Kyiv East Source: Own calculations based on Ukrainian National Competitiveness Report 12, Foundation for Effective Governance The has also somewhat better indicators on other indicators, such as business regulations, access to finance, and corruption and crime. Though doing business in the ern region seems to be easier in many respects than in other regions, the region lags behind in FDI inflows. This is due to the fact that, Ukraine, in general, attracts FDIs on the basis of its natural resources, availability of production factors, infrastructure and market size, which are more favorable in the East.

Ukraine Macroeconomic Situation

Ukraine Macroeconomic Situation In 2012, industrial production was down by 1.8% yoy as weakening global demand for steel exerted a toll on the Ukrainian metallurgical industry. Last year, harvested 46.2 tons of grains and overseas shipments